A Piece Of The Puzzle Missing From Cholamandalam Investment and Finance Company Limited's (NSE:CHOLAFIN) Share Price

There wouldn't be many who think Cholamandalam Investment and Finance Company Limited's (NSE:CHOLAFIN) price-to-earnings (or "P/E") ratio of 29.3x is worth a mention when the median P/E in India is similar at about 31x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

With earnings growth that's superior to most other companies of late, Cholamandalam Investment and Finance has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Check out our latest analysis for Cholamandalam Investment and Finance

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Cholamandalam Investment and Finance.

Is There Some Growth For Cholamandalam Investment and Finance?

In order to justify its P/E ratio, Cholamandalam Investment and Finance would need to produce growth that's similar to the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 28% last year. The strong recent performance means it was also able to grow EPS by 136% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 25% per annum during the coming three years according to the analysts following the company. That's shaping up to be materially higher than the 20% per annum growth forecast for the broader market.

In light of this, it's curious that Cholamandalam Investment and Finance's P/E sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Final Word

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Cholamandalam Investment and Finance's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Having said that, be aware Cholamandalam Investment and Finance is showing 2 warning signs in our investment analysis, and 1 of those is potentially serious.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.